European politics

Spain's budget

More pain

SPAIN'S budget for next year was revealed properly in parliament on Saturday, filling in the gaps of the incomplete and partial version offered after Thursday's cabinet meeting.

There is no surprise in the basic recipe of more austerity that Cristobal Montoro, the budget minister, is cooking up for a year in which the deficit is meant to fall from 6.3% to 4.5% of GDP. That is some €19 billlion ($24 billion) in a year of shrinking growth when Spain must also pay an extra €9.7 billion in debt servicing and cannot count on income generated by this year's one-off tax amnesty. It is an extremely tough task, even with the help of September's sales tax hike.

So why is Mariano Rajoy's government so determined to increase all pensions? The real problems lie in the forecasts. First, Mr Montoro still insists Spain will finish the year with a deficit of 6.3% GDP. Few believe that. Regional governments are not expected to meet their targets. Unemployment costs were meant to fall, but have risen 5.5% up to July. And central government's deficit was 4.3% of GDP up to August when the year's target is 4.5%.

Next, the growth projections for 2013 look over-optimistic. Analysts generally see the economy shrinking two to three times more than Mr Montoro's 0.5% of negative growth with all that means to tax income and social costs. Angel Laborda, of the Funcas think-tank, sees a need for total savings via tax hikes and cuts of €50 billion, or a whopping 5% of GDP--and that assumes that Spain starts from a 6.3% deficit.

The biggest shock in the figures is the cost of Spain's banking crisis. Mr Montoro says losses on bank rescues will add a further 1.1% of GDP (or €11.6 billion) to this year's deficit, bringing the real projected figure to 7.4%, though the government says such one-off costs do not compute when calculating whether it meets the Brussels-set deficit target. He has, for the same reasons, also added an extra 0.5% of GDP (€5.1 billion) to last year's deficit taking it, in real terms, up to 9.4%.

Bank bailouts also show up in the soaring national debt as the government expects banks to need €40 billion from euro zone bailout-funds. Debt rises to 90.5% of GDP in 2013, reflecting also the impact of a €27 billion fund set up to pay off a huge backlog of unpaid bills owed by regional governments. It is fortunate that Spain started the crisis with national debt at under 40% of GDP.

The government says the cost of debt servicing is further proof of the need for deficit control. That does not extend, however, to pensions. The reason? It is probably that Mr Rajoy has important regional elections coming up in the north-western region of Galicia on October 21st where a third of adults are past, or very close to, retirement age. They will very unhappy if he backtracks later.

Readers' comments

Mr. Rajoy only fights for the position and privileges of 400.000 politicians that are ruining Spain. It is a harsh battle between an oversized public sector, that Spain can't afford, and a private sector that must endure salary reductions, tax increases and 25% of unemployment rate.

I only will come up with some examples of Spanish non-sense public sector :

-Triple politicians than Germany(albeit Spain has half population)

-8000 town halls (Germany has 2000)

-5000 unprofitable public companies, crowded of relatives and friends of the politicians

-Four different institutions for each issue. State, autonomous region, local government and deputations.

-30 ruined public TVs, very useful as propaganda centers.

-up to 200 regional embassies around the world (e.g. Catalonian embassy in USA is located in Rockefeler Center, the most expensive rent in NYC)

-The best public health care sector in Europe

-Over three years of public unemployement benefits (highest in Europe)

-And the famous public pharaonic infraestructures, as airports without passengers, high speed trains toward no man's lands and highways without traffic.

If our politicians had a realistic plan to overcome the crisis Spanish population would accept the cuts, but everybody knows that the only plan of Mr. Rajoy is to preserve actual size of Spanish public sector, and thereby, to mantain the status and way of life of the politicians, their relatives and friends that support him.

European bailout must require the rationalization of Spanish public sector, otherwise Europeans will be wasting their money and riots in front of the Spanish Congress will worsen.

The Eurozone unemployment rate stands at 11.4%, with Spain near an awesome 25%. The situation is getting worse and recession raising its ugly head ever higher, despite all the desperate effort to revive the economy.

There is no panacea, short of enduring a much less lavish and flamboyant lifestyle for years. Are Europeans willing? Are they ready? (btt1943, vzc1943)

On the judiciary you're so right - in Spain as in every country, but perhaps even more so. We must:

Accelerate the judiciary:
- for all evidence that can be submitted online (e.g. framing the case, making pleas, initial witness statements, documents, expert testimonies, etc), submit it online! Save everybody's time - don't make everybody sit through court cases or proceedings unless they directly pertain.

- for cross questioning sessions or such, use some variant of doodle to arrive at mutually convenient times (so far as possible). The court should be in contact with everybody several hours before the session to clear that everyone is still attending as required, and is prepared to meet their obligations. Where that isn't the case, the session should be called off and everyone notified in advance, with the reason for suspension duly noted in an online case portal (along with all evidence relevant to the case).

- if the evidence base is already there, proceed to conclusion - no breaks, no long intermissions, no recess, no suspensions. Follow the time critical path. There should be enough resources in the judicial system to proceed without delay or backlog.

- every bit of evidence, every moment of every session, all correspondence of judges or jury, all notes and deliberation, should be clearly recorded in the case portal. In event of an appeal, this entire evidence and decision base should be available for full examination (content & procedure), alongside any new submissions - it shouldn't be necessary to repeat everything (or indeed, to repeat anything unless procedures were improper).

Clean up the legislation:
- parliaments must devote an equal amount of time to striking off, merging or simplifying legislation as it spends drafting new legislation.

- all legislation should be presented pedagogically in an online portal - accessible for everyone. Purpose should be clearly stated, metrics for success should be clearly stated, all cases of application should be linked, etc. Users (citizens) should be able to upload clarification videos, questions, explanations or petitions and tag them to any bit of legislation. Legislation must be human understandable and be of a comprehensible volume - otherwise it must completely fail in its purpose, which is to influence human and business behaviour for the better.

Legal systems, in every country, need to be brought forward from the 18th to the 21st century. Faster, cheaper, online, administration partially automated, more transparent, simpler, cleaner, and more easily open to review & appeal. Radically.

Just the usual infantile comment from a catalan nationalist. And it shows the complex of superiority that these people have (it will turn nasty if they achieved their objective). Nationalism is the curse of Europe

I am not a fan of Mr Rajoy but at least I am grateful of having again, after the dark hours of Mr Zapatero- a prime minister able to have a voice in Europe.
This said, if he is able to forge deals in Europe, if he (his team) has marked a difference with the previous PSOE government, why his reforms are media oriented? where are the real plans? Almost a year after his election, no deep reforms (except tax increases and salary cuts) have taken place. And I think that we all are starting to wonder if there has ever been a plan,
The best I can say is that he has done nothing structural, although he has been quick to put on our shoulders big financial cuts.
This makes me dream the impossible: As I have tried to tell in my just created blog (htt:/wp.me/p2KoGX-4) the main problem that Spain faces, that a politician could solve and become in the future a national hero, is our institutional mess. We are governed by the Franco´s Corporate State, formed by the parties´, trade and employers unions´ bureaucracy. The executive and legislative powers and, to a lesser extend, the Judiciary, and the "funcionarios", are toys to keep the public, both internal and external, busy.
That double model of state multiplied by 17 regions and thousands of local entities (not to talk about fake charities, companies, NGOs) is ruinous.
But, which politician, what sort of Heracles, could take the task of dismantling an incredibly complex, chaotic system, to which he belongs? Is Mr Rajoy that man? Thanks good, we do not need to find out. As I told Mr Rajoy in an email that I do not know if he ever read, the backlash against the socialist government has given him an unique opportunity. Suddenly, the PP has so much power to occupy, that they could reduce the size of the State and democratize it, and their (my) ranks would still enjoy a formidable power and personal well being.
As that reform is incredibly complex, and controversial, simply planning it would take a vast amount of time and resources.
I dare to dream that he read my email, or that by any other mean, even by EU Commission imposition, he has decided to do this. And that the lack of progress of its´ government is due to it´s completely focus in that reform. In making the changes that will carry us from dictatorship to democracy.
Yes, in nights like this, I dare to dream in Mariano Rajoy to become the man that really ended the Spanish Transition.

Best policies for deficit reduction:
- eliminating the reduced and super-reduced rates of GDP. Eliminate the universal subsidy for uncooked food, paper books, sewage and pest control. Give restaurants and bars a chance of competing with food retailers and grocery stores. Insofar as this is inequitable, only a small proportion of the subsidy money could be targeted directly at those in greatest need (which right now means the unemployed).

- cut military spending. 1.1% of GDP is far more than Ireland, Austria, Iceland, Switzerland or Hungary. Cut it brutally - 0.5% of GDP is quite enough. Maintain investment in education rather than spending on guns.

- raise retirement ages immediately to 67 (Norway/ Iceland/ Sweden/ Denmark) or 70 (Czech Republic). Then index state retirement age to life expectancy (for each year that life expectancy rises, lift state retirement ages by 9 months). Use the savings to invest in apprenticeship places, subsidised internships, subsidised short-working arrangements or targeted loans for start-up businesses and self employed - target government money at those most in need (and where there is real potential for supporting Spain's future).

Aside from deficit cutting measures (which are themselves vital), there is obvious desperate need for pro-growth liberalisation and for tackling income inequality where it is sharpest (not for mollycoddled pensioners, but for young people, young families and the unemployed).

An absolutely ridiculous policy that discourages people from starting their own business in a country where "entrepreurship" is all the rage. Lower the contribution and lower the tax rate for the "autonomos". This provides incentives to increase local/national economic activity, increase participation in the dangerously social security system and could even provide opportunities to improve youth employment as these entrepreneurs may start to hire/expand. Good ideas, keep ´em coming people!!

You have not included abolition of the counterproductive rule that requires any new "autonomo" (i.e. freelance worker or budding entrepreneur) to bay several nudred euros a month in social security contributions from day one, regardless of income or turnover.

You have not included abolition of the counterproductive rule that requires any new "autonomo" (i.e. freelance worker or budding entrepreneur) to bay several nudred euros a month in social security contributions from day one, regardless of income or turnover.

You have not included abolition of the counterproductive rule that requires any new "autonomo" (i.e. freelance worker or budding entrepreneur) to bay several nudred euros a month in social security contributions from day one, regardless of income or turnover.

On liberalisation, the most urgent reforms are:
- free all new businesses (created since 2005, say) to hire and fire just as easily as in Denmark (with immediate effect). By restricting this to new businesses initially, this avoids mass redundancies in the midst of recession, but provides new firms with the freedom to recruit people even in uncertain times. Commit to extending flexicurity to all firms (the full workforce) once unemployment has fallen below a threshold (say, 12%).

- abolish corporation tax, entirely or incrementally (though with a big initial increment). Right now, corporation tax isn't bringing in significant revenue - so this wouldn't worsen the short run deficit. A lower corporation tax (remove the discrimination between debt & equity finance of investment or working capital) would however make it far easier for banks to recapitalise or for exporters to expand & support higher trade volumes. By boosting demand and mobilising the market to recapitalise, a lower marginal corporate tax rate would pay for itself in the long run (but a first move should at least match Irish corporation tax rates - with announced intention to further decrement it to zero).

- apply relentless pressure to accelerate rollout of a single European financial regulator & resolution mechanism (even if that means following German proposals, and only covering the biggest banks initially). Just providing German & Dutch depositors with insurance to put cash directly in sound Spanish banks would radically improve access to finance for good Spanish businesses (especially exporters).

- deregulate professions & such. Allow online pharmacies (that is, allow online ordering of prescriptions, with only automated checking for comparable prescription combinations); open the market for a national champion to emerge - as the first to reach scale, it would no doubt have the potential for successfully expanding across Latin America, Europe and perhaps even the US.

- move to a single VAT rate - eliminate reduced and super-reduced VAT. Right now, there is effectively a subsidy for purchase of uncooked food. That is a market distortion which discourages marginal consumers from doing what they actually wanted (to eat at a restaurant, or eat take-out food). That's inefficiency - it creates deadweight loss (directly reducing GDP) and hits local employment (fewer local jobs in restaurants & bars). Simply removing the distortions of different VAT rates is itself pro-growth liberalisation, even when it is the subsidies that are being removed.

That's the golden 5 - that should be the focus as far as pro-growth liberalisation is concerned. That still leaves other deficit cutting, good investment, expansion of labour force and reduction-of-inequality concerns. But these are the 5 main liberalisation concerns, and they are the matters which most urgently need more attention than they're getting.

The Spanish government just channels resources from the productive parts of the economy to the unproductive parts. VAT and income tax are raised because there is fraud (so the Finance minister said): wouldn't it be more sensible to reduce fraud? Government money goes to subsidies, banks, big construction companies, utilities, etc.
It's the same cycle as 400 years ago. First, Spain has unexpected luck (American gold then, EU membership now). Then they blow the money in idiocies (was in Flanders then, real estate development now). The government not only tolerates this but is an open advocate of unproductive sectors of the economy (aristocracy then, banks and construction companies now). The only good thing is that now the cycle is faster and that we Catalans have a good chance to get out of this.
Let's hope however leads the bailout has the intelligence to realize how Spanish economy works and the will to change it.

A bit off topic, but I'm curious what happens if there really is a 'Catalonia' event and they secede from Spain? Do they automatically become part of the EU? The EZ? Even if they don't do they use the Euro during a 'transitional' period? Could this 'constitutional crisis' possibly show other 'cracks in the foundation' of the EU? Food for thought and probably just 'hypothetical' questions.

Thanks for your reply and for puting the firs in your line the Judiciary. I will read carefully the rest of your proposal and think about them.

I do not know where you live but in the south of Spain, back in 2009 we were supposed to have the judges connected via a intranet (Named ADRIANO), that allowed them to do most of the things you propose; The trials were recorded and a copy given to the parts, so precious time were saved; an so on... according to the official reports I had read. So when my friends told me that the courts had almost no computers (except if take into account early 1990s ones), and that the recording procedure failed more often that it worked (But now there was no real act because it was supposed not to be needed), and about missed bits of evidence, endless delays, unmottivated suspensions...
There I undestood where our priorities should be.

"Legal systems, in every country, need to be brought forward from the 18th to the 21st century. Faster, cheaper, online, administration partially automated, more transparent, simpler, cleaner, and more easily open to review & appeal. Radically."

I agree much of public spending in Spain is redundant and politically manipulated. But figures speak for themselves: Catalan offices abroad cost a total 34,61 M € in 2011; those set up by Castilla-la Mancha regional government cost 45,30 M € (serving a much reduced population); those from the Andalusian regional government cost 140 M €, always in 2011. AND I can tell you this offices can be profitable and bring about a number of business contracts to manufacturers. Meanwhile, building a new residence for the Spanish ambassador in Marocco cost recently 6 M € to all Spanish taxpayers, as well as 50.000 € a swimming pool in Saudi Arabia's embassy. Moreover, they are not always considered to be efficient offices in dealing with the public.
Mind me, it is quite annoying to see how Catalan initiatives are sistematically dispised. If you want to avoid being blamed for using Catalans as scapegoats, do not use them as scapegoats with the wrong facts, please.